COR - Senate RRD and House BI

---------- DOCUMENT HEADER ----------

ARIZONA STATE LEGISLATURE

Forty-ninth Legislature – First Regular Session

SENATE RETIREMENT AND RURAL DEVELOPMENT AND

HOUSE OF REPRESENTATIVES BANKING AND INSURANCE

COMMITTEE OF REFERENCE

FOR THE SUNSET REVIEW OF THE DEPARTMENT OF INSURANCE

Minutes of Interim Meeting

Wednesday, November 4, 2009

House Hearing Room 5 – 1:30 p.m.

Co-Chairman McLain called the meeting to order at 1:30 p.m. and attendance was noted by the secretary.

Members Present

Senator Ron Gould, Co-Chair	Representative Nancy McLain, Co-Chair
Senator Sylvia Allen	Representative David Bradley
Senator Linda Lopez	Representative Carl Seel
Senator Rebecca Rios

Members Absent

Senator Steve Pierce

Representative Robert Meza

Representative Doug Quelland

Presentation by Legislative Staff

Stacy Weltsch, Research Analyst, House Banking and Insurance Committee, advised that the purpose of this meeting is for the sunset review of the Department of Insurance. The mission of the agency is to administer the state insurance laws, protect the citizens of the state who purchase insurance, provide information and respond to consumer needs and encourage competition to stimulate the Arizona insurance market. The last sunset meeting of the Department of Insurance was held in 1999 and the Legislature passed a bill the following session to continue the agency for ten years. The termination date of the Department is July 1, 2010.

Response by the Department of Insurance

Christina Urias, Director, Arizona Department of Insurance (DOI), testified that it has been an honor and a privilege to serve in the capacity as Director of the Department of Insurance for the past six years. She spoke of the importance of insurance, particularly because of the economic crisis over this past year. The Department is responsible for overseeing the insurance companies who do business in Arizona. She advised that there are approximately 2,000 licensed companies doing business in the state. Approximately 365 of those are Arizona domestic companies who are domiciled in the state. Title 20 requires the Department to do a financial examination on those companies once every five years to ensure financial solvency. It is the responsibility of the Department to make sure companies doing business in Arizona have the funds to pay claims that they owe. The Department handles approximately 50,000 inquiries and complaints from Arizona consumers every year. Currently the Department monitors the licensure of 162,000 insurance agents or producers in the state and their compliance with Arizona law. She reported that there has been no insolvency of any domestic company over the years that she has been Director; the Arizona companies have remained solvent due to the capital requirements and the oversight of the Department of Insurance in Arizona as well as insurance departments across the nation. She related that DOI coordinates with other states in sharing financial information on the solvency of companies. She referred Members to the Sunset Review Report which provides information on what the Department does as a state agency (Attachment 1).

Because of the budget crisis over the last year, Ms. Urias related that the Department is doing more with less resources. Her staff of 97 serves the insurance community, consumers and the taxpayers. The Department oversees approximately $440 million in insurance premium tax revenues that comes into the state to the General Fund. She disclosed that the Department has revitalized its website. Annual reports submitted to the Legislature over the years are available for viewing on the website.

In response to Co-Chairman McLain, Ms. Urias revealed that in July 2008 the Department had 128 employees and now has 97 due to layoffs or terminations. There is shared work and responsibilities to ensure continuity of the oversight that the Department performs.

Ms. Urias answered questions posed by Representative Seel about insurance premium tax revenues ($440 million), licensing fees ($9 million), how rates are determined and whether rates of each insurance company are evaluated. She advised that Arizona is a “use and file” state which is open competition. Arizona law provides that rates must not be inadequate, excessive or discriminatory. The Department reviews and evaluates the actuarial justification for the rates submitted by the insurance companies. She related that the marketplace in Arizona is competitive and the rates are held at that level by the competition. Representative Seel asked for further clarification. He queried whether rate filings are treated the same as when it was a “prior approval” environment. He noted that there are a lot of efficiencies that could be achieved by the agency with open competition and not as much staff is needed because the free market keeps rates appropriate. Ms. Urias answered that the efficiencies achieved by the use and file system far outweigh those of the prior approval system. She maintained that Arizona consumers are better served by the current system rather than by the prior approval system.

Representative Seel raised the issue of solvency and asked whether there appears to be any trend of insolvency, specifically in the 365 companies domiciled in Arizona, given the current economic situation. Ms. Urias revealed that each state in the country follows the National Association of Insurance Commissioners’ (NAIC) financial solvency program called the Risk Based Capital (RBC) formula. All the state insurance departments use this formula to evaluate and share information on the financial health of the 7,000 plus insurance companies doing business in the United States.

In reply to Co-Chairman McLain, Ms. Urias spoke of the stability of the insurance marketplace and advised that the Department has not had to take any steps relating to insolvency issues of Arizona domestic companies.

Co-Chairman Gould asked whether the Department regulates derivatives. Ms. Urias answered in the negative.

In reply to Representative Seel, Ms. Urias clarified that the Department had 20,000 requests for review relating to property and casualty insurance alone last year; there is another 5,000 to 6,000 on the life and health side. She pointed out that those included rate reviews as well as document reviews and applications. She advised that a reduced staff has resulted in extended timeframes in responding to those requests.

Representative Seel asked about fraud referrals and conviction rates in the past year.
Ms. Urias referred Members to the table on page 14, Sunset Factor 6, and noted that on average, there have been about 200 to 250 referrals per month. Because of budget cuts last year, staff in the fraud unit has been reduced from 14 to 4. She disclosed that consumer fraud is increasing across the country, not just in Arizona.

Representative Bradley questioned the impact of a 15 percent cut on the Department.
Ms. Urias responded that the impact would be severe, noting that the agency has already lost 31 employees. She opined that it would require the Department to further reduce staff, affecting its ability to audit returns and to help consumers. She said she feels that Arizona consumers would suffer from reduced services.

Discussion and Recommendations by the Committee of Reference

Discussion ensued on the length of time that the Committee could recommend for the continuation of the Department of Insurance.

Co-Chairman McLain conveyed that the Committee could make a recommendation that the Department be continued for up to ten years.

Senator Lopez suggested a ten-year continuation. She said it appears that the agency is doing a really good job.

Co-Chairman Gould said the problem he has with ten-year renewals is term limits and said he believes the recommendation should be for eight years because legislators are term-limited to eight years and no one here today will be here in the same position when this agency comes back for review.

Senator Rios concurred with Senator Lopez on the ten-year renewal because there are no substantial issues or concerns. She related that because of budget cuts, the Auditor General’s Office (AG) has had to revise its audit schedule and is not able to do everything that was asked of it.

Representative Bradley concurred. He stated that renewals take a tremendous amount of time and effort. Additionally, the Legislature reviews each agency in the budget process every year and if there are concerns they will show up in that process, so there is a check and balance system in place. He said it is important to show confidence in the agencies and he reiterated that there are annual reviews via the budget process.

Representative Seel asked what the common practice is for other agencies. Senator Lopez explained that it depends on the agency. In instances where many concerns have been uncovered by the investigations, renewals have been recommended for shorter periods of time depending on what the concerns are. She contended that it is important to allow the AG’s Office to have the time to focus on those agencies with serious problems. Representative Seel thanked
Senator Lopez for her explanation. He said that the last report he has is when the Auditor General took a look at the Department in 1995.

Ms. Weltsch agreed with comments made by Senator Lopez that renewals are done on a case-by-case basis and related that ten years is the norm if there are no problems. She advised that the AG’s report to which Mr. Seel referred is the last report of the Department because the Committee of Reference (COR) process takes the place of the AG’s report so this COR report would be the review that the AG might do. She explained that the Attorney General has statutorily-mandated reviews that they do but this is not one of them. She stated that the 1995 AG’s report has been replaced by this COR process, so there will not be an AG report unless it becomes statutorily mandated that the Auditor General review the Department of Insurance.

Senator Allen said she understands the concerns expressed about the length of time; however, she thinks it is dependent upon the agency and she thinks ten years is fine for renewal of the Department of Insurance.

Representative Seel stated that since the Attorney General is not going to look at DOI again, he would like the Department to prepare a report to address concerns raised in the 1995 audit.
Ms. Urias advised that Arizona is a member of NAIC and is audited by that organization every year. In addition NAIC performs a five-year on-site examination and review to accredit the Department. To get that accreditation, the Department must show that its financial solvency efforts and activities comply with the national standards and the national model. In its five-year review last year, the agency received one of the highest scores in the country.

Representative Seel queried whether that five-year review covered how the Department is performing in reference to the Department’s statutory requirements and responsibilities. He submitted that the Committee might be able to use the NAIC performance reviews in its consideration of how the Department is performing. Ms. Urias explained that the five-year review focused on financial solvency of the companies it regulates and the Department’s statutory responsibilities under Title 20, in terms of protecting consumers, policyholders and the public.

Senator Allen moved that the Committee of Reference recommend to the full Legislature that the Arizona Department of Insurance be continued for ten years.

Co-Chairman Gould moved a substitute motion that the length of the sunset review be reduced from ten years to eight years. The motion failed by a voice vote.

Question was called on the motion that the Arizona Department of Insurance be continued for ten years. The motion carried by roll call vote of 6-1-0-3 (Attachment 2).

Without objection, the meeting adjourned at 2:20 p.m.

___________________________________

Joanne Bell, Committee Secretary

December 7, 2009

(Original minutes, attachments and audio on file in the Chief Clerk’s Office; video archives available at http://www.azleg.gov)

---------- DOCUMENT FOOTER ---------

COR – Senate RRD

and House BI

November 4, 2009

---------- DOCUMENT FOOTER ---------